In financial economics, the first step is to identify your goal and price it in risk-free terms. There is an investment known as the risk-free asset that offers investors something no other asset can: predictability. In finance, risk-free promises a certain payoff no matter what happens. If markets crash, you know what you’ll get paid. If markets boom, you only get paid what you were initially promised. The price of that risk-free asset is the most critical piece of information in any investment problem, or any decision, you might face.
